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More on discontinuity of reported income

In prior posts I’ve noted that some of the measured inequality trend is actually an artifact of where income is reported. Particularly after the 1986 tax reform, income has moved steadily from corporate returns to individual returns, exaggerating the growth of the top 5% or so (business owners) if you look only at their individual reported income (another thing that had the same effect was the elimination of a variety of deductions from AGI). Here is some more data on that point:

More than 90 percent of businesses, representing more than one-third of all business activity, in the United States are structured as flow-through entities — businesses that do not pay the corporate income tax, but rather pass profits through to owners who pay tax under the individual income tax. Over the past two decades, the importance of flow-through businesses — partnerships and S corporations in particular — has grown dramatically. In 2012 net income from sole proprietorships, partnerships, and S corporations totaled nearly $840 billion and accounted for more than 9 percent of
total adjusted gross income reported on individual income tax returns. … [I]income from partnerships and S corporations has more than tripled as a share of AGI since the late 1980s.

An accurate rendering of inequality stats derived from income data has to grapple with this. Even Piketty doesn’t try. Furthermore, this is another reason we should abolish corporate income taxes and just tax income once. There are complications with that as well (undistributed profits), but they are surmountable, I believe.